The valuation premium for SaaS is 5x revenue, but SaaS may be harder to scale

09/27/2016By Sammy Abdullah, CFA

We recently compared the valuations of software companies with various business models. The goal was to understand the real premium received by companies with a SaaS revenue model over others. The three types of revenue models we looked at were SaaS, services, and hardware. In conclusion, SaaS trades at a median of 6.16x LTM revenue, services trade at 1.1x, and hardware trades at 1.1x, so SaaS companies are earning a premium of 5x over other business models typically associated with software. The data is below.

TTM

TTM

TTM

Capital

Enterprise

Market

Revenue

EBITDA

Revenue/

SAAS

Ticker

Revenue

EBITDA

OCF

Surplus

Value

Cap

Debt

Cash

Multiple

Margin

(D+E)

2U

TWOU

$177

-$22

-$4

$356

$1,460

$1,670

$0

$188

8.3x

-12%

$0.50

Athenahealth, Inc.

ATHN

$1,010

$85

$171

$522

$5,150

$5,000

$295

$134

5.1x

8%

$1.24

Bazaarvoice, Inc.

BV

$200

-$15

$19

$419

$259

$338

$42

$95

1.3x

-8%

$0.43

Benefitfocus, Inc.

BNFT

$212

-$36

-$35

$310

$1,300

$1,230

$75

$68

6.1x

-17%

$0.55

Box, Inc.

BOX

$327

-$156

-$38

$871

$1,400

$1,490

$56

$183

4.3x

-48%

$0.35

BroadSoft, Inc.

BSFT

$314

$38

$64

$333

$1,200

$1,250

$195

$264

3.8x

12%

$0.59

Castlight Health, Inc.

CSLT

$82

-$77

-$58

$426

$219

$368

$0

$121

2.7x

-94%

$0.19

Cornerstone OnDemand, Inc.

CSOD

$389

-$52

$48

$394

$2,460

$2,470

$234

$267

6.3x

-13%

$0.62

Cvent, Inc.

CVT

$211

$8

$46

$219

$1,140

$1,360

$0

$177

5.4x

4%

$0.97

Five9, Inc.

FIVN

$145

-$5

-$1

$181

$713

$722

$44

$58

4.9x

-4%

$0.65

Fleetmatics Group PLC

FLTX

$311

$67

$99

$321

$2,160

$2,330

$23

$194

7.0x

22%

$0.90

Hortonworks, Inc.

HDP

$155

-$219

-$98

$519

$298

$571

$0

$109

1.9x

-141%

$0.30

HubSpot, Inc.

HUBS

$225

-$41

$11

$323

$1,930

$2,020

$1

$117

8.6x

-18%

$0.69

IntraLinks Holdings, Inc.

IL

$285

$14

$35

$456

$524

$490

$80

$39

1.8x

5%

$0.53

Jive Software, Inc.

JIVE

$202

-$14

-$10

$384

$205

$312

$2

$108

1.0x

-7%

$0.52

Lifelock

LOCK

$632

$35

-$38

$532

$1,390

$1,590

$0

$156

2.2x

5%

$1.19

LinkedIn Corp.

LNKD

$3,430

$396

$1,000

$4,589

$23,730

$25,660

$1,150

$3,310

6.9x

12%

$0.60

LivePerson Inc.

LPSN

$232

$16

$36

$287

$360

$420

$0

$52

1.6x

7%

$0.81

LogMeIN, Inc.

LOGM

$309

$37

$91

$277

$1,940

$2,090

$45

$225

6.3x

12%

$0.96

Marin Software, Inc.

MRIN

$108

-$8

$5

$276

$69

$100

$2

$35

0.6x

-8%

$0.39

Marketo, Inc.

MKTO

$241

-$51

-$4

$345

$1,490

$1,580

$1

$100

6.2x

-21%

$0.70

Medidata Solutions, Inc.

MDSO

$421

$52

$96

$366

$2,950

$3,110

$256

$318

7.0x

12%

$0.68

MobileIron, Inc.

MOBL

$158

-$65

-$35

$343

$177

$311

$0

$85

1.1x

-41%

$0.46

NetSuite Inc.

N

$846

-$59

$117

$993

$8,670

$8,740

$286

$408

10.2x

-7%

$0.66

New Relic, Inc.

NEWR

$202

-$61

$10

$347

$1,610

$1,800

$0

$196

8.0x

-30%

$0.58

Proofpoint, Inc.

PFPT

$313

-$60

$57

$441

$3,090

$3,130

$356

$412

9.9x

-19%

$0.39

Qualys, Inc.

QLYS

$182

$43

$75

$223

$912

$1,110

$0

$214

5.0x

24%

$0.81

RealPage, Inc.

RP

$514

$68

$108

$472

$2,100

$2,010

$124

$47

4.1x

13%

$0.86

RingCentral, Inc.

RNG

$339

-$9

$19

$320

$1,560

$1,690

$17

$148

4.6x

-3%

$1.01

salesforce.com, Inc.

CRM

$7,070

$522

$1,930

$5,706

$55,030

$54,780

$2,070

$2,030

7.8x

7%

$0.91

ServiceNow, Inc.

NOW

$1,190

-$91

$98

$1,141

$12,020

$12,380

$491

$807

10.1x

-8%

$0.73

Splunk, Inc.

SPLK

$729

-$291

$163

$1,529

$7,290

$8,330

$0

$1,020

10.0x

-40%

$0.48

SPS Commerce, Inc.

SPSC

$176

$18

$21

$265

$986

$1,120

$0

$128

5.6x

10%

$0.66

The Ultimate Software Group, Inc.

ULTI

$700

$66

$120

$523

$6,000

$6,150

$10

$98

8.6x

9%

$1.31

Veeva Systems Inc.

VEEV

$439

$87

$148

$362

$4,730

$5,240

$0

$457

10.8x

20%

$1.21

Wix.com Ltd.

WIX

$241

-$45

$27

$193

$1,440

$1,580

$0

$128

6.0x

-19%

$1.25

WorkDay, Inc.

WDAY

$1,260

-$194

$328

$2,248

$14,790

$16,370

$514

$2,080

11.7x

-15%

$0.46

Zendesk, Inc.

ZEN

$261

-$78

$15

$512

$2,680

$2,890

$0

$224

10.3x

-30%

$0.51

Secureworks

SCWX

$362

-$57

-$18

$588

$1,010

$1,140

$0

$124

2.8x

-16%

$0.61

Appfolio, Inc.

APPF

$90

-$8

-$2

$142

$583

$637

$0

$22

6.5x

-9%

$0.64

Atlassian Corporation

TEAM

$457

$9

$130

$461

$5,830

$6,260

$0

$743

12.8x

2%

$0.99

Twilio

TWLO

$219

-$30

-$2

---

$4,700

$4,920

$0

$261

21.4x

-14%

---

Instructure

INST

$92

-$48

-$21

$189

$602

$672

$0

$62

6.6x

-52%

$0.49

Mindbody, Inc

MB

$120

-$24

-$13

$270

$662

$1,020

$16

$88

5.5x

-20%

$0.42

Shopify

SHOP

$282

-$21

$11

$243

$2,990

$3,300

$0

$180

10.6x

-7%

$1.16

Xactly

XTLY

$81

-$17

-$7

$151

$397

$424

$15

$46

4.9x

-21%

$0.49

Median

$272

-$16

$20

$362

$1,475

$1,630

$2

$152

6.1x

-8%

$0.64

Average

$564

-$6

$102

$675

$4,178

$4,395

$139

$355

6.4x

-12%

$0.70

TTM

TTM

TTM

Capital

Enterprise

Market

Revenue

EBITDA

Revenue/

TECH SERVICES

Ticker

Revenue

EBITDA

OCF

Surplus

Value

Cap

Debt

Cash

Multiple

Margin

(D+E)

Accenture

CAN

$32,280

$5,420

$4,020

$4,517

$67,290

$70,150

$29

$3,500

2.1x

17%

$7.10

Booz Allen

BAH

$5,480

$509

$25

$243

$6,070

$4,630

$1,610

$180

1.1x

9%

$2.96

CACI Intl

CACI

$3,740

$334

$243

$558

$3,940

$2,480

$1,480

$49

1.1x

9%

$1.83

CGI Group

GBI

$8,120

$1,390

$1,050

$128

$15,970

$14,600

$1,490

$216

2.0x

17%

$5.02

Ciber

CBR

$728

-$18

-$25

$369

$146

$97

$40

$11

0.2x

-3%

$1.78

Cognizant Tech

CTSH

$12,990

$2,590

$1,940

$453

$29,330

$33,050

$909

$4,480

2.3x

20%

$9.54

Edgewater

EDGW

$119

$8

$6

$210

$98

$105

$5

$11

0.8x

7%

$0.55

EPAM Systems

EPAM

$1,040

$158

$117

$303

$3,310

$3,550

$40

$281

3.2x

15%

$3.03

Gartner

IT

$2,310

$385

$349

$819

$7,880

$7,460

$846

$445

3.4x

17%

$1.39

ICF Intl

ICFI

$1,160

$109

$87

$280

$1,170

$854

$318

$11

1.0x

9%

$1.94

Infosys

INFY

$9,750

$2,700

$1,970

$0

$32,460

$36,480

$0

$4,680

3.3x

28%

---

Insight Enter

NSIT

$5,350

$179

$79

$317

$1,220

$1,150

$243

$175

0.2x

3%

$9.56

IBM

IBM

$80,260

$17,970

$18,600

$0

$183,120

$148,140

$45,520

$10,620

2.3x

22%

$1.76

Leidos Holdings

LDOS

$5,240

$444

$365

$1,433

$3,570

$6,460

$1,090

$670

0.7x

8%

$2.08

ManTech Holdings

MANT

$1,590

$122

$161

$438

$1,530

$1,540

$0

$40

1.0x

8%

$3.63

Perficient

PRFT

$485

$59

$53

$365

$754

$715

$36

$53

1.6x

12%

$1.21

Science Applic

SAIC

$4,520

$341

$234

$215

$4,070

$3,080

$1,060

$115

0.9x

8%

$3.55

Unisys Corp

UIS

$2,940

$203

$124

$4,501

$428

$474

$420

$464

0.1x

7%

$0.60

Virtusa Corp

VRTU

$671

$50

$27

$297

$755

$727

$192

$188

1.1x

7%

$1.37

Wipro

WIT

$7,380

$7,860

$1,070

$221

$21,280

$24,000

$1,920

$4,820

2.9x

107%

$3.45

Median

$4,130

$338

$198

$310

$3,755

$3,315

$369

$202

1.1x

9%

$2.08

Average

$9,308

$2,041

$1,525

$783

$19,220

$17,987

$2,862

$1,550

1.6x

16%

$3.28

TTM

TTM

TTM

Capital

Enterprise

Market

Revenue

EBITDA

Revenue/

HARDWARE

Ticker

Revenue

EBITDA

OCF

Surplus

Value

Cap

Debt

Cash

Multiple

Margin

(D+E)

TiVo Corporation

TIVO

$508

$169

$123

$2,446

$2,490

$1,770

$1,010

$274

4.9x

33%

$0.15

Motorola Solutions, Inc.

MSI

$5,370

$1,320

$1,000

$119

$16,220

$12,870

$5,030

$1,590

3.0x

25%

$1.04

Garmin Ltd

GRMN

$2,900

$657

$576

$1,870

$7,910

$9,050

$0

$1,050

2.7x

23%

$1.55

Apple Inc.

AAPL

$220,290

$73,960

$63,170

$30,106

$578,030

$586,450

$84,940

$62,620

2.6x

34%

$1.91

Universal Electronics Inc.

UEIC

$644

$63

$43

$240

$1,020

$1,050

$43

$49

1.6x

10%

$2.28

BlackBerry Limited

BBRY

$1,900

$301

$62

$2,448

$2,980

$3,980

$1,250

$2,230

1.6x

16%

$0.51

Logitech

LOGI

$2,050

$203

$222

$30,148

$2,990

$3,510

$0

$440

1.5x

10%

$0.07

iRobot

IRBT

$630

$68

$51

$146

$889

$1,070

$0

$173

1.4x

11%

$4.32

Nokia Corporation

NOK

$19,850

$2,270

-$1,380

$680

$24,700

$32,750

$4,380

$12,580

1.2x

11%

$3.92

GoPro, Inc.

GPRO

$1,240

-$200

-$53

$688

$1,510

$1,850

$0

$279

1.2x

-16%

$1.80

Koninklihke Phillips N.V.

PHG

$27,390

$2,620

$2,020

$3,101

$30,850

$26,810

$6,540

$2,170

1.1x

10%

$2.84

Fitbit Inc

FIT

$2,210

$228

$213

$826

$2,480

$3,070

$0

$760

1.1x

10%

$2.68

Harman International Industries

HAR

$6,910

$883

$447

$1,412

$6,360

$5,740

$1,400

$611

0.9x

13%

$2.46

ZAGG Inc

ZAGG

$308

$35

$23

$92

$282

$216

$73

$9

0.9x

12%

$1.87

Cannon

CAJ

$35,100

$5,390

$4,750

$4,789

$31,900

$31,270

$5,920

$5,370

0.9x

15%

$3.28

Sony Corporation

SNE

$76,580

$6,310

$8,900

$19,437

$41,620

$41,230

$0

$279

0.5x

8%

$3.94

Eastman Kodak Co.

KODK

$1,710

$264

-$21

$639

$775

$622

$676

$513

0.5x

15%

$1.30

Voxx International Corporation

VOXX

$672

$6

$20

$295

$172

$77

$105

$9

0.3x

1%

$1.68

HP Inc.

HPQ

$99,880

$9,210

$5,140

$1,003

$25,270

$24,840

$6,830

$5,640

0.3x

9%

$12.75

LG Electronics

LGLG.F

$50,920

$3,260

$3,130

---

$8,670

$3,330

$8,010

$2,720

0.2x

6%

---

Toshiba

TOA.F

$1,100

$56

$0

---

$132

$426

$155

$446

0.1x

5%

---

InfoSonics Corp

IFON

$44

-$2

$2

$33

$5

$8

$0

$3

0.1x

-5%

$1.32

Emerson Radio

MSN

$33

-$2

$10

$80

-$26

$28

$0

$53

-0.8x

-5%

$0.41

Median

$2,050

$264

$123

$826

$2,980

$3,330

$155

$513

1.1x

10%

$1.87

Average

$24,271

$4,655

$3,846

$4,790

$34,227

$34,436

$5,494

$4,342

1.2x

11%

$2.48

While the valuation multiple of a company or industry is driven by a number of factors including growth and cash flow, the revenue model/business model is one of the major drivers. To the extent you can make your business fit into the SaaS mold, you absolutely should for valuation purposes. That said, the data indicate SaaS businesses are harder to build:

-SaaS margins are awful. SaaS companies have median EBITDA of only -$16mm for a margin of -8%. Meanwhile, technology services companies and hardware have median EBITDA of $338mm and $264mm for margins of 9% and 10% respectively. While the SaaS revenue model of contracted recurring revenue may be attractive, the margins of the business are truly abysmal relative to other types of software companies. So while you may not get as much of a valuation premium for non-SaaS revenue, don’t dismiss it completely: the cash flow from a services contract can help fund the growth of your business.

-SaaS companies are small. The median revenue of the SaaS companies shown is only $272mm. Meanwhile, the median revenue of tech services and hardware is $4.1bln and $2bln respectively. There may be a few reasons for this: i) SaaS businesses are relatively newer as a business model, so these companies haven’t had as much time to mature; and ii)the sales cycles for SaaS businesses are longer, so it takes more time to build a large business.

-SaaS companies are inefficient. SaaS companies generate far less revenue per dollar of investment than their counterparts. To measure this, we looked at revenue/ (debt + capital surplus). Capital surplus is a fancy yet imperfect measurement of equity invested in the business. The median ratio for SaaS businesses is only $0.64 per dollar of investment whereas tech services generate $2.08 per dollar of investment and hardware generates $1.87 per dollar of investment.

The key-takeaways: while the SaaS premium may be larger at 5x due to the contracted recurring nature of the revenue, the margins are lower, sales cycles longer, and SaaS is less capital efficient. The data shows that it’s harder to build a SaaS business, but you’re going to see the benefit of the hard work in the valuation.